Koninklijke Ahold Del Ord

Ladies and gentlemen, good morning and welcome to the analyst conference call on the second quarter and half year 2022 results of Aarhus Dalherza. Please note that this call is being webcast and recorded. Please note that in today's call, forward-looking statements may be made. All statements other than statements of historical facts may be forward-looking statements. Such statements may involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those included in the statements. Such risks and uncertainties are discussed in the Interim Report, Second Quarter and Half Year 2022 and also in Ajo del Herza's public filings and other disclosures. Ajo del Herza disclosures are available on ahodelherza.com. Forward looking statements reflect the current views of AHOL DEL HERZE's management and assumptions based on information currently available to AHOL DEL HERZE's management. Forward looking statements speak only as of the date they are made and AHOL DEL HERZE does not assume any obligation to update such statements except as required by law. The introduction will be followed by a Q&A session. Any views expressed by those asking questions are not necessarily the views of AHOL. At this time, I would like to hand the call over to JP O'Meara, Senior Vice President, Head of Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'm delighted to welcome you to our Q2 2022 results conference call. On today's call are Franz Muller, our CEO, and Natalie Nice, our CFO. After a brief presentation, we will open the call for questions. In case you haven't seen it, the earnings release and the accompanying presentation slides can be accessed through the investor section of our website, aholtales.com, which also provides extra disclosures and details for your convenience. To ensure everyone has the opportunity to get their questions answered today, I ask that you initially limit yourself to two questions. If you have further questions, then please re-enter the queue. To ensure ease of speaking, All growth rates mentioned in today's prepared remarks will be at constant exchange rates unless otherwise stated. I now turn the call over to Frans.

Thank you very much, JP. And first of all, let me wish you a happy birthday on this special day. And good morning, everyone. I'm very pleased to report another strong and resilient quarter for Ajo de Lesse. Every strategy at Hourglass starts and finishes with the customer. And let me assure all stakeholders listening to this call today that particularly now, when times are getting tougher, we are leaving no stone unturned to support customers in our own unique way. Powered by rich data and insights, our unparalleled understanding of customers, our broad assortment, and the stickiness of food at home consumption are allowing us to play to our strength. This in turn is driving continued market share gains and strong business performance. For customers and businesses alike, these are without doubt uncertain times. The war in Ukraine is causing an unprecedented energy crunch, especially in Europe. Commodity prices are high. Inflation has reached record levels. Interest rates are rising and the undeniable effects of climate change are constant in our daily lives. Rapid cost of living increases are putting customer households and budgets under pressure. So in response, as you can see on slide six, we are doing what we do best, visibly and proactively supporting customers in our own stores and our omni-channel touchpoints, helping them to navigate and manage their spending efficiently. Three things in particular are making a big difference. First of all, We have been fast and agile in introducing more entry-price product solutions in stores and online, as always weighted towards affordable fresh and healthy food options. Second, we are expanding our high-quality, healthy and better value own brand assortments. And third, we are ensuring our increasingly personalized loyalty programs continue to offer competitive and attractive solutions. For example, in Q2 in the US, CRM campaigns, excluding Fresh Direct, run by the brands reach over 27 million households and delivers 5.3 billion personalized offers. In a large part, we are able to fund these and other activities through our ongoing Save for Our Customers programs. And for those of you who are unfamiliar with these annual programs, they help our great local brands absorb cost increases to invest in better customer propositions and to keep shelf prices as low as possible. Our efforts in this respect are clearly paying off. Customers vote with their feet, their clicks and their wallets. They expect consistency from us in offering great value, convenience and innovation. And it is through this consistency and the relentless execution of our leading together strategy that we are able to deliver the type of financial performance we are proudly reporting today. With 4.7% growth in comparable sales, excluding gas and diluted underlying earnings per share up 11%, our Q2 results exceeded our original expectations and contributed to the raise in full-year earnings and free cash flow guidance for 2022 that Natalie will talk about later. Before that, let me share a few strategic highlights and proof points that underpin how all of our brands deliver sequential improvements in comparable sales compared to the first quarter. Starting with our customer priority as seen on slide 10. The focus of this priority is to unlock the creativity and innovation of our teams to cement deeper and more digital customer relationship. Some great examples include, for example, Albert Heijn launched the innovative Best from the Netherlands, Lekkerster uit Nederland campaign and introduced the Beta Eten festivals for customers to experience first-hand the Albert Heijn mission, make better food accessible for everyone. Deleuze in Belgium implemented Little Lions with price reductions of 5 to 30% on the selection of 500 own brand products. And after the program's first month, Deleuze has already seen a 15% increase of Little Lions product sales. Food Lion introduced a rotating daily meal deal that feeds a family of four for $12 only and a weekly daily deal of meat and cheese. And lastly, Hannaford redesigned their time savers program to increase visibility on the assortment of affordable ready meals aligning directly with a fresh and convenient strategy. Moving on to our operational priority. which is the enabler of our omnichannel transformation geared to drive long-term operational efficiency. We know that customers really value our omnichannel ecosystems, which offer them the flexibility and convenience of shopping whenever and wherever they want. And looking at slide 10, we again accomplished a lot in the quarter. In Europe, Albert Heijn expanded their delivery area, making online shopping now accessible to 90% of Dutch households. And in Belgium, Deleuze launched DeliveryPlus, a subscription service for its online home delivery that offers unlimited free delivery. Additionally, we are proud of the successful transition of the York, Pennsylvania distribution center into the self-managed network. This brings our total number of network facilities in the US to 22. ADUSA Supply Chain also implemented a new solution for all direct-to-store delivery vendors. DSD vendors, which provides better visibility into cost, margin, and profits on items received at stores. The last two initiatives I mentioned in particular show how optimizing our supply chain is also scaling up to provide future operating margin support by reducing product cost and increasing product availability. Moving on to our next priority, healthy and sustainable. For a long time, sustainability has had a central position in our organization. Not only is it one of our key focus areas, but more importantly, it's a critical driver of our purpose. Eat well, save time, live better. And in Q2, we again have many highlights to share with you, which you can see on slide 12. Of particular note is the publication of our second human rights report in June. In addition, Outerless also maintained its MSCI ESG AA rating, with improvements noted in several criteria. In the US, Giant Food has partnered with Loop, a circular reuse platform, to bring reusable packaging solutions to customers. And in light of the ongoing climate and energy crisis, Albert Heijn is accelerating the switch to renewable energy sources. Here the brand will increase the number of electric trucks and delivery cars it uses, starting with a 100% electric delivery fleet in 2022, for the The Hague city centre with Rotterdam, Utrecht and Amsterdam to follow in 2023. The brand aims to switch completely to biofuels for all its transportation by 2024 and to no longer rely on gas for climate control in stores in the Netherlands and Belgium by 2023. That's already next year. Moving on to our final focus area, our portfolio priority. This is a good opportunity to spend a few minutes to provide an important update on the intention to subipoball.com. As you will remember, we first announced our intention to subipoball.com at our November Investor Day 2021. in order to build on the remarkable success, customer loyalty and leadership position of BOL.com as a retail tech platform. We continue to believe strongly in the value and potential of BOL.com, underpinned by its ongoing robust market share gains, as well as its high customer and partner satisfaction scores. However, in light of current equity market conditions, we have decided that the second half of 2022 is no longer the right time to pursue a sub-IPO of Bold.com. We remain committed to securing the right future path to unlock value for Bold.com and I, all the less. We will continue to actively monitor market conditions and revisit opportunities where market conditions are more conducive. Like other digital companies in Europe, Bol.com is adjusting to a more dynamic economic climate. Therefore, we have completed a detailed review and revised Bol.com's medium-term growth and investment plan to provide additional flexibility and agility going forward. Our revised plans will ensure we remain in a strong position to continue to outgrow the market. This in turn is expected to yield healthy double-digit sales and EBITDA compound annual growth rates in the medium term, as well as deliver above group average return on capital as the business will scale. As a result of these revisions, we are also updating our group capital expenditure and free cash flow guidance accordingly. Group capex will now average around 3% of group sales from 2022 to 2025, versus our original guidance of 3.5%. We will continue to focus these investments on our growth-oriented omnichannel transformation, including elevating our store networks, increasing automation and mechanization, unlocking monetization potential, and increasing last mile delivery infrastructure. Throughout all these areas of investment, we are also committed to furthering our efforts to reduce our climate impact. Given the ongoing strength of our underlying operations, together with this new CAPEX plan, we are also increasing our cumulative free cash flow expectations for the period of 2022-2025 to around 7.5 billion euro, compared to our original expectation of over 6 billion euro. One of the core strengths of our company is to generate cash. This gives us great protection to weather any storms the environment may throw at us, while at the same time providing plenty of leeway to continue investing in our customers, our associates, and future-proofing our organizational infrastructure, as well as ensuring a fair remuneration of all other stakeholders. Despite the expectation that challenging times remain ahead, I'm confident that our brands are on the right path to support all our stakeholders and deliver on our ambitious goals. We have positive momentum going forward into the second half of the year. And on that note, let me now hand over to Natalie, who will add her comments on the quarter and provide further specifics on the outlook for 2022.

Thanks, Frans, and good morning, everyone. We have a lot to be proud of this quarter, thanks to our strong team and business model. So let's move quickly into the details, starting with the headline figures. Net sales were up 6.4%, or plus 15% at actual rates, to 21.4 billion euro. Q2 group comparable sales grew 4.7%. Group net consumer online sales increased 4.8%. For context, excluding Bold.com, our net consumer sales in grocery increased by 11.5%, highlighting the trend that online food shopping is definitely here to stay. Group underlying operating margin was 4.1% in Q2, down 0.4 percentage points compared to Q2 2021. This reflects higher labor, distribution, and energy costs, which were largely offset by higher pricing and cost savings initiatives. Diluted underlying earnings per share were 59 cents, up 11%. This was driven by higher operating income, a lower tax rate, and higher share in income from joint ventures, which more than offset higher financial expenses, which are mainly FX-related. Our EPS growth rate also benefited from our ongoing share buyback program. we purchased 9.5 million owned shares in the quarter for 255 million euro. This brings the total amount to 523 million euro for the first half of the year. Slide 17 shows our results on an IFRS reported basis for Q2. Let's turn now to our regional performance. Moving on to slide 18, you see comparable sales growth by region, including and excluding weather and calendar effects. While results in the quarter were impacted by timing of inclusion of Easter and the exclusion of 4th of July in the states, however you look at it, both regions saw very healthy sequential improvements on both metrics compared to the first quarter. This is particularly visible in the U.S., where the consistent and robust performance of our U.S. brands continued. In the quarter, net sales increased by 7.7% and comparable sales growth was 6.4%. Net consumer online sales grew by 16.4%, with e-commerce penetration rates increasing 60 basis points to 7.3% as we continue to scale up our operations and roll out new omni-channel opportunities for our customers. The underlying operating margin in the U.S. remained at a robust 4.7% level, down only 0.3 percentage points from last year despite significant cost increases throughout the value chain. In addition to the strong progress of supply chain initiatives that Franz mentioned earlier, I'm also pleased to report that 80 USA companies also successfully implemented SAP S4 HANA, another critical initiative to transform legacy finance and IT systems. As we modernize that operational backbone in the U.S. region, I'm confident in the value unlock of opportunities this will provide to further support margins in the region over the coming years. From a brand perspective, Food Lion continues to perform strongly, achieving its 39th consecutive quarter of comp sales growth. Stop and Shop also delivered positive comps in the quarter, and momentum has continued to improve over the course of the summer. To drive its turnaround in a more focused geographical way, we announced a $140 million targeted investment for New York City stores over the next two years. This investment is focused on improving store layout and product presentation, to showcase our assortment in a more compelling way that really embraces the diversity of the neighborhoods and communities Stop and Shop serves in the greater New York City area. Turning now to Europe, net sales increased 4.2% in the quarter. Despite continuing to cycle prior year lockdown measures in the Benelux for part of the quarter, we delivered comparable sales growth of 1.8%. This was supported by market share gains at Albert Heijn, Bull.com, and in Central Europe. Net consumer online sales were down 1.1% following 27% growth in the same period last year. Underlying operating margin in Europe was 3.4%, down 0.8 percentage points compared to last year due to significant cost inflation and an expected lower contribution from Bull.com to a year ago. I'll come back to how we address the European margins, but let me first spend a moment on Bull.com. In Q2, Bull.com net consumer sales declined by 2.1%, which is much improved from the Q1 decline of 6.5%. Bull.com's sales from its now 50,000 partner-strong third-party platform network increased 2% in the quarter. Bull.com's gross merchandise value, excluding VAT, was €1.3 billion in Q2, down 1.7% compared to the prior year, which is a very strong result against a market backdrop which is estimated to have been down in the high single digits for the quarter. Its strong position with customers and partners has therefore again yielded strong market share gains for Bull.com, which we estimate to be well over a percentage point again this quarter. With the European macroeconomic environment becoming much more dynamic and unpredictable, our European teams are leaning in with a three-fold approach. Firstly, we'll focus on driving volume, market share, and customer loyalty with dedicated programs for these tough times. This includes a strong focus on leveraging everyday low-price programs and own-brand product development, to which France has already given plenty of examples. Secondly, being prepared for tougher times means squeezing more juice from the lemons. Here, on top of the normal save for our customer practices, we are looking even deeper at how we can accelerate lowering our structural costs and simplifying processes. This means, wherever possible, empowering our people to create more agile organizations, leveraging best practices to capture scale. One such initiative is a new central and southern European strategy and operating model that leverages brand proximity to address similar challenges and common solutions across the market. Here we now have one common management structure and have already made the corresponding management changes. We are also moving to a common assortment, IT infrastructure, and many other aligned ways of doing business. In Benelux, we're also increasingly leveraging our regional platform to drive synergies more aggressively for Delhaize and our operations in Belgium. In fresh sourcing, We are moving more volumes to our strategic partners that are able to service both Belgium and the Netherlands. This creates a shorter, more transparent value chain with less cost, ensuring better prices for both farmer and customer. We're also accelerating our journey to drive scale in our own label assortment by harmonizing our underlying processes and procedures across Benelux brands with a particular focus on entry price products. I'm confident that these and other future initiatives will lead to improving margin levels in Belgium already in the second half of this year and next. Thirdly, we are keeping a tight eye on capital expenditure timing and scope to reflect the current dynamic and inflationary environment. We've talked about this in previous quarters, and it's an important example here is when we look at the revised investment plan of Bol. In this new plan, which follows a much more phased approach, It's less capital-intensive while continuing to support BOL.com's midterm ambitions and growing infrastructure needs. Taking all three of these measures together, we expect to unlock between €250 million and €300 million in additional cost savings cumulatively in the next three years. We're confident that we will see first signs of progress and margins in the second half of 2022 – and bring underlying operating margins for Europe back to the 4% mark in coming quarters. Moving on to slide 24 and switching back to the group, Q2 free cash flow was €594 million, an increase of €166 million compared to Q2 2021, mainly driven by higher operating cash flow and favorable working capital development. So in summary for today, following our strong half-year results, our proactive approach to managing the current economic climate, as well as the positive momentum we are seeing and continuing to see in the U.S., we are increasing our 2022 guidance. We now expect underlying EPS to increase by mid-single digits compared to 2021 and free cash flow to be approximately 2 billion euro. The rest of our targets for the year remain unchanged, including our expectations of an operating margin of at least 4%, and net capital expenditures are expected to total approximately 2.5 billion euro. Let me emphasize that we remain committed to delivering strong shareholder returns now and in the future. Our 2022 interim dividend will be 46 cents compared with 43 cents last year based on the group's interim dividend policy. This means that we are clearly on track to again increase our full year dividend. We also know Our share buybacks are another key driver of EPS growth, and we are more than halfway to executing our €1 billion share repurchase plan for 2022. In conclusion, we are very proud of the accomplishments at Aco de Les over the past quarter. Our associates and leadership teams continue to show tremendous agility, striking a good balance between delivering on the short-term commitments while at the same time advancing us steadily toward our medium- and long-term goals. In dynamic and challenging times like these, above all else, we know it's important to keep things simple. We're focusing on our strengths and we're leaning in on those things that are under our control. Thank you very much for your continued interest in the company and operator. Please open the lines for questions.

Thank you. As a reminder to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. Once again, if you would like to ask a question, please press star 1 and 1. We will now take our first question. Please stand by. And your first question today comes from the line of William Woods from Bernstein. Please go ahead, your line is open.

Good morning. Good news that the bowl.com IPO is paused. Question, does this affect your 2025 ambition of the kind of two times net consumer sales, two times EBITDA and the shift in shipments facilitated by bowl and the view of getting to a high percentage of next day orders? And then the second one, just on stop and shop. Can you detail any progress that you're seeing there? And with the $140 million that you've invested in New York, are you making any investments in price, or is it just the stores and the range? Thanks.

So, William, hi, good morning. It's Natalie. Let me start on the Bull.com. And, yes, we have changed our outlook for Bull.com. We're looking at double-digit sales growth and profitability growth on an annual CAGR basis in the medium term. And so that is different than what we said last year, the investor day. But I think it's something we're still very proud of that development. And that's also something that's allowed us, as we've discussed, to reduce in the short term our expectations for investment. We're really going to do a much more phased approach as opposed to front-loading everything. And that's been the backbone of us being able to increase our free cash flow guidance today.

And William, on stop and shop, At the moment, we have modernized and remodeled 145 stores of the Stop and Shop network, which is roughly 400 big. And we are very happy with the performance there. We hit or we exceed the pro forma of those stores in our sales numbers. Gordon and his team did an excellent job in learning about those remodelings to see how can we do those remodelings even more efficient at a lower cost. And that, of course, is also helping. Down at the $40 million for the New York area is to support our great locations in the New York boroughs, where we need to invest in the proposition, not only in the real estate in itself, but also in the assortments. And the last store, which we opened in the Bronx, does extremely well in hitting better the customer expectations for the Hispanic and African-American community in that Bronx neighborhood. We always said that we would like to modernize and remodel the Stop & Shop brand, which is a combination of, let's say, the customer proposition and the assets and the experience in itself, but also that we will invest in price. And that's what we are doing. And I can tell you that we are very happy with the present momentum of Stop & Shop, especially also the momentum starting now in the third quarter. Great.

Thank you.

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of Fabienne Courant from Kepler. Please go ahead. Your line is open.

Yes, good morning, everyone. Two questions from my side. First one, can you remind us what will be the capex for Boyd this year? Because I remember it was to be, you were expecting something like 500 million. You're not changing your capex for this year, 2.5, so I guess You've got, as you said, raising costs and the dollar that may be offsetting. That would be the first question. And the second question, can you share with us how your weight of private label has moved during the quarter in Europe and in the U.S. in thinking about trading down from consumer? And any comments regarding how consumer is behaving in Europe and the U.S. would be appreciated. Thank you.

Super. Fabienne, I'll start with the CapEx and we'll look at the private label and consumer market. On the CAPEX side with respect to bull, you're right in that we are going to be spending less this year than what we had initially anticipated. That's something, it's not a huge amount, but it is something we are shifting into other omnichannel and ESG investments. That's the reason we haven't changed our CAPEX guidance for the year. But when you look at the bull investments going forward, I want to make sure that it's really clear that This is not a tone down of what are we planning to invest in the business? It's just really looking at the phasing of it. I think what we had anticipated as we finished everything coming out of COVID last year was that there was really going to continue to be an upsurge in the market that we needed to be ahead of. And I think now we see very realistically that there's an opportunity for us to do a much more phased and agile approach, which allows us to stay ahead of the market in terms of capacities. but really be able to phase that, I think, in a way that's more rational for the market conditions.

Bonjour, Fabienne. On private label, you know very well that we have roughly a 15% share, a 5-0 share in the Benelux, a 13% share private label in the U.S., and a close to 25% share in the South and Central Eastern European markets. So we have considerable high shares, substantial shares in all our brands. What we see happening and when I start with the Benelux first that we see indeed a growing private label share where customers also see the value proposition of our private labels where we worked on very hard as I said in my speech. So we reformulated a lot of products to be and affordable and healthier and more attractive both in the center store so the dry area but also in the fresh categories and what is this gave us for example in the belgium and the dutch market is we did a lot on price entry products natalie already referred to it and that that part of our assortment is growing our private label brands have roughly a two to three percent better margin than our national brand products in the shelf and we see an increased sales uptake in those brands it's not only for us that we um that we deliver more sales, it's also that we deliver more solutions. So especially also in these difficult times for consumers, we also try to give advice and solutions for customers, how to cook your meal for two euros. Or we talked about the daily meals, the deal meals, the meal deals at Food Lion with a smaller budget, how to have an affordable and healthier meal. So it's all assortment in fresh and in center store is growing in share. In the U.S., the private label shares are growing, but at a little bit slower pace. We still have to suffer a little bit with the supply chain in the U.S., but now the supply chain is getting back for the total business, national brands, and private label, and we will also see an uptick there. Also there we see incremental sales growth in our private label shares, and the same is for Southeast Europe. And you can imagine that customers are now really comparing on the shelf The price value of our private labels, if it's price entry or mid or high tier, compared to national brands, that's what's happening now with the inflation levels we see. And the other thing what we see is that for every customer, for every wallet, we have solutions in all our stores. And I think that's the strength of our total business model.

And I might add, Fabian, because you asked a little bit about commentary on U.S. and European consumers. what's going on there. I think what we hear from everybody these days is that if we're not in a recession, we're certainly in times that feel challenging. And what we notice is that the price elasticity of our customers in Europe is higher, that people are really starting to feel the tightening wallets there. And I think a lot of the comments you heard from France in terms of how we're approaching that with the higher private label, with more entry-priced products, with the tailored... loyalty programs. Those are all ways that we're approaching that very proactively. When we look at the U.S., what we do find is that the consumer remains healthier. They still continue to be pretty well supported. And it's definitely something in both our markets where we're seeing that in this flight to value, where again, remember that with the exception of our bull business, 95% of our business is non-discretionary, meaning It's less sensitive to some of the consumer sentiment in tougher times. We're continuing to see nice market share gains in the majority of our brands.

Discretionary as in general merchandise, right?

Correct.

That's not for everybody. That word isn't for everybody clear in Europe, but the non-food and the general merchandise. We don't have a lot of exposure. And also at Bold.com, by the way, we don't have a lot of exposure to general merchandise either. That was a long answer, Fabian. Was it okay for you?

Apologies, sir. Fabian has dropped off and is back in the listen-only mode at the moment.

All right. Okay, okay. It's a tough discipline here in the call, but it's okay.

Thank you. I will now go to the next question. Please stand by. And your next question comes from the line of Nick Coulter from Citigroup. Please go ahead. Your line is open.

Hi, good morning. Thank you. So two, if I may, please. Franz, when you laid out the 3.5% capex guide rail, it was the bold capex. It was also about accelerating the top line more broadly. How should we think about the taper to 3% in the context of your top line targets? I guess I'm trying to understand how you might deliver the same with less. I'll go one by one, if I may, lest I get put back into the room. Thank you.

Maybe let me start on that one, Nick, on the CapEx. If you remember when we did the Investor Day CapEx detail last year, we really talked about maintaining 3% for the group, and that being above industry average, of course. and that was because we really do believe there are big investments we need to make in omni-channel, and it's really about a shift from how do we be smarter with our investments as we go forward, and that's why we maintained that 3%, which is, I'll say, at least a half a percent above what you see most of our competitors spending. The incremental was really what would we do in terms of being able to jettison that bull.com growth, and that's something that, as I said, I think as we've reviewed what's the market conditions and how can we be more agile in that environment, we've said we think we can spread that in a better way across a longer period, which allows us to hold the 3%. So we remain, I think, very optimistic about the outlook for the business as we go forward between now and 2025.

And Nick, I think it's also just good entrepreneurship, right? You see that markets for bull are softer than we anticipated. they still gain market share, so they're ahead of the market. And the team is very agile there and said, well, then we have to come up with a different investment plan, which is still providing capacity in time to grow with the plans, but at the same time also have a better spread and a lower capex allocation for the total company. So we could marry those two. We had not foreseen those because we expected a much stronger market, but the market doesn't give this, although we gain share. So the team did an excellent job there to... to make sure that things meet here, and that's a big part of the explanation there.

Okay, thank you. Then secondly, if I may, on Belgium, could you talk a little bit about the financial performance of the company-operated stores versus the franchise stores, please? It sounds like market share is obviously still a challenge in Belgium. Thank you.

Yeah. The Belgian market, as you heard from us earlier, and you might have also heard this from a few other competitors, is a very tough market. A tough market in overstored markets, in growth levels, in cost levels, especially for labor, as we all know. So that did not change dramatically. But what we can say is the following. If you look at our total market share in Belgium and We see that Albert Heijn AT Stores is growing quite fast and Deleuze also got better over the quarter. That as a company in total we have roughly a flat market share in Belgium. Then coming back to your question on franchised stores and company operated stores. What we see in the total network is that franchise stores are most of the time having a slightly better performance because they deal with, especially in Belgium, with different rules of the game. For example, you know that, Nick, the franchise stores in Belgium can have Sunday openings, which is not allowed for company operated stores under our CLAs. That is the same for CLA operating other retailers, by the way. So they have an advantage there. Weekends got heavier. So the franchisees have a better business performance there than the overall company operated type of stores because it's an unequal comparison. Having said that, we, and Natalie already mentioned, alluded to this, given the situation in Belgium, we will step up our programs on efficiency and cost savings to invest further in our brands. And we are very hopeful that those will materialize soon and that we also see there a better sales number, but also a better European underlying profit. In the start of this third quarter, we see already better sales numbers coming in for Belgium.

Super helpful. Thank you so much.

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of James Grudzinich from Jefferies. Please go ahead, your line is open.

Yes, good morning, everybody. Happy birthday, JP, I guess. Just two quick questions. The first one, Franz, for you, I was just looking back at some of your past quotes on consolidation and your choice of words back in the September CMD, talking to being the consolidator of choice now. Do you think that applies to the historic approach in terms of infill activity, or are you keen to perhaps increase your ambitions on that front? That'd be useful to understand. And perhaps one for Natalie. There's really been quite a major shift in the P&L economics in the US in Q2 versus Q1. It would be very helpful to understand Any of the component parts behind that, if we were to compare to performance pre-COVID levels, I presume is both gross margin and OPEX-driven. But if you could help us understand the building blocks of that, that would be very helpful. Thank you.

Thank you, James. I might sound, for sure sound like a broken record when I talk about our view on growth. First of all, we see, especially after COVID, we will see a further level of consolidation, both in the European and the US markets, and that on an omnichannel base, that will be platforms, that will be store networks. And we have a very active M&A strategy. That means that we would like to be a part of that consolidation. But talking about growth, we first would like to grow, preferably, like for like, the same square meters, because that's the most profitable, Then we look at dancing up and infill in geographies where we are already. You've seen a few examples in the last 12 months. And we also have an open eye for adjacencies where we can spread our geographies for regions or for countries which we know. So that is an unchanged view there. And you know that we have a strong balance sheet. We have in itself firepower. But at the same time, we also have a very busy period now, and we need all hands on deck to make sure that we focus on our present business and that we run our business in the best possible potential way, execute on our strategies. But if there are M&A opportunities which fit strategy and which fit our digestion power, then we will look at those. But that's the active M&A strategy, as you know from us.

And on the US P&L structure, I think what you're referring to is just that you see a nice lift in the underlying operating margin, and that's one where you know in Q2 versus Q1, all of our brands increase their momentum, and what we see is just a pretty big impact of that sales leverage. So in Q2, you had a comp of 6%. In Q1, it was 3%. That really helps in terms of how we see that play through the P&L.

Understood.

Thank you. Thank you. We will now take our next question. Please stand by. And your next question comes from Victoria Petrova from Credit Suisse. Please go ahead. Your line is open.

Thank you very much and congratulations on strong results. My first question is on guidance. Looking at your current EPS guidance, and I understand it's the second upgrade, which is very unusual for current performance in food retail sector. But actually, it's a just sort of flattish second half development and looks relatively conservative once compared to very strong first half. I wanted to ask you, what are your key assumptions related to consumer behavior, any behavior of shocks? inflation, and any other considerations you sort of put into this guidance when you assess your second half. And my second question, could you provide some additional color on your U.S. online performance, both on the revenue market share side as well as on the cost side, given your investment in automation? Thank you very much.

Okay. Vicky, thanks for the questions. In terms of EPS, you're right. It is something when we look at what happened between Q1 and Q2, essentially that we saw an improvement in terms of what was happening with our U.S. business, both in terms of what it delivered in the second quarter and our outlook for the rest of the year. We also have seen an improvement in the U.S. dollar. So when you look at how the first half and the second half compare, What I'd say is we do expect to see underlying improvements in the second half. Remember that in our first half results, we have a pretty hefty one-time impact because of interest rates, about $75 million. That won't repeat, obviously. We're expecting to be quite small in the second half. And so that's something that is a difference there. Our assumptions are that inflation is going to stay low. at pretty elevated levels throughout the rest of the year before we start to see it moderate in 2023. We're expecting the U.S. dollar to be around where it is today, which is a little bit better. We were around 105 at Q1. We now see it about 102. And interest rates are also, we're expecting, again, to stay, I'll say, with the expectations for the rest of the year, a couple more hikes, but starting to see that moderate as we get closer to the end of the year.

And maybe, Victoria, a little bit more color on how we see the second half of this year for Europe.

Yeah, I think that one, thanks for calling that one out, Franz, because I think what is important when we look at Europe is that we really do believe we've bottomed out in terms of the UOM performance or the margin performance. That was something where we've started to see some acceleration in sales in the second quarter, and summer is giving us also positive impacts there. But I think the real driver of that is going to be this increased efforts on the saving side one, are saved for our customer activities are always a little second half weighted. That's the same this year. But we also made comment of the increased savings program, that $250 to $300 million that we expect to come in over the next this year and following two years. We'll get about 25% of that this year, and we'll see the rest of it come in over the next two years. So I really feel confident in terms of our ability to deliver that. I would say to your very first question, which was, is it conservative? I think there are still a lot of unknowns out there in terms of the environment. It is something where we do feel more cost-conscious consumers. We think we have the right recipe for success, but it is something where that's kind of the driver behind why we've come up with the guidance as we've got it.

We also know, Victoria, that the bold.com business from its nature is, of course, back-loaded in sales and profitability also for the second half, so that also will kick in more in the second half than in the first half. Then on the US online, we are proud within the 16% growth number for online in the US, which as you know is only food. We reach now a good 85-90% of all our customers with an online proposition in food. We stepped up our shares on click and collect to more than 60% which is also beneficial in itself for profitability over time because of deliveries are so expensive we stepped up a few partnerships also in a controlled way that means in the data controlled way as you know from us so also we get there more leverage there and I must say the investments made in in the online sales area is developing very positive with our Peapod digital apps based in Chicago. We get more and more better solutions with their own made software called Prism for in-store pig, store specific pig, so very close to the customer. The full assortment also for all the local ethnic assortments. So I think we get better and better there including our loyalty systems in an omnichannel fashion. I think we are proud about the growth there. If you then see the two years or the three years stack, it's quite impressive.

Thank you very much. And automation of online fulfillment is less of a priority now, or am I mistaken?

No, I would phrase it a little differently because labor in general in our total business if it's warehousing or e-commerce fulfillment the availability and the cost of labor are of course challenges in all the markets where we are so in the european markets we see we approved a few automation projects for our home shop centers in the us we have more automations in the number of dc's and frozen disease coming online and also in our online business in the U.S., we still have a number of experiments running to see what is now the right thing here. But it's still not easy to find out the best technology which gives you the required productivity. So it's ongoing. We are on top of this. And also for a big group in our company, the whole mechanization in general or automation is still a big priority in Victoria. So no, no, it's not... It's not face down, but it's not so easy to find the best solutions.

Thank you very much and again congratulations.

Thank you.

Thank you.

We will now take our next question. Please stand by. Your next question comes from the line of James Anstead from Barclays. Please go ahead. Your line is open.

Yes. Good morning. Just one question for me, probably for Natalie, but it's just a question on your free cash flow guidance. You're forecasting now two billion this year and about seven and a half for the four years as a whole, which basically seems to imply about a 10 percent step down for years two, three and four compared with this one. which in a way seems surprising because my understanding was this year probably wouldn't be a vintage year for working capital given the very strong starting position. So I suppose my question is, is the forecast for the four years as a whole just reflecting a bit of natural prudence or is there anything you would highlight that's unusually positive about this year or anything we should just be careful about in years two, three and four? Thanks.

Yeah, James, I think what we really wanted to do with our free cash flow guidance was to make sure that people saw that now as we're looking forward, we believe in a post-COVID world, we are able to continue to generate free cash flow at a level that is at or in fact above where we were prior to that period in time. So when we look at this year and we say the $2 billion, part of that is coming from improved operations, but we definitely also have a piece that is coming from working capital in terms of lower than what we had expected. I think at the beginning of the year, we talked about about a 200 million give back following COVID. I think that number is going to be a lot lower than that as we look at it today. And as we go forward, I would say I remain very optimistic in terms of the underlying potential we can deliver as a group. So we've set around seven and a half. That could be a little lower. It certainly could be a little higher. So that's one where I would say don't be discouraged in terms of the outlook. We feel very confident that we are going to continue to deliver outstanding free cash flow as we go forward, and that's why the language was so strong in my prepared remarks.

Very helpful. Thank you.

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of Robert Jan Vos from ABN AMRO-ODO. Please go ahead. Your line is open.

Yes. Hi. Good morning. I have two questions. Natalie, you spoke about the timing of the European EBIT margin getting back to 4%. That went a bit fast. Can you say what you meant timing-wise for Europe's EBIT margins? That's my first question, and second, and it's a bit nitty-gritty. What is the jump in share in income of joint ventures that we see in the second quarter? Thank you.

Okay, so as we look at the first question that was just repeating everything on the UOM for Europe, and essentially my only comment there was we think we've hit the bottom in terms of where the operating margin is for Europe this quarter, and that we expect that to improve as we go through the end of the year, and we expect that by the end of the year we will be at least at that 4% mark. So that was the commentary that we gave in terms of where the margin was going. Would you repeat the second question for me?

Yeah, it's a bit nitty-gritty, but I saw that income from joint ventures jumped to $21 million. Is there anything... extraordinary in that, or can you explain the 21 million?

Yes, it's a very, it's actually a pretty small number, and that's just a sale of an asset at Stop and Shop. I think we actually had, last year we purchased something, so there's a little bit of an offset that way as well.

Okay, thank you. Claire?

And we were... We were, John, earlier already clear about Europe. We said that the second quarter would have the same type of profile UOM as the first quarter, which it turned out to be. And from here on, we will have sequentially rising UOMs. That's the planning. And we gave you already some indication where that should come from, but you guys are used to a 4% margin in Europe, and that's where we would like to bring Europe back also to the group margin level.

Very clear. Thanks, Franz.

Thank you. We will now take our next question. Please stand by. And your next question comes from the line of Andrew Porteus from HSBC. Please go ahead. Your line is open.

Yeah. Hi, team. A couple from me, if I may. The first one on Stop and Shop. Apologies if I missed it. I got cut off earlier in the call. But I noticed a comment around positive comps in the quarter. That sounds like it still might be market share losses for stock and shops. So some color there would be helpful. And if you are still losing market share, I was just wondering if in the stores that you've refreshed so far, are the market share trends a lot better than the overall business? And then the second question was really around the Bold.com IPO. Obviously, you've pulled that for the moment and found a way to sort of self-fund, I guess, the CapEx program. Is that something we should think about you revisiting in the future? Or given that you've got this new CapEx profile, is that less of a priority and we could maybe look to better disclosure as a way of sort of tracking the progress and allowing the market to better value that business in future?

Thank you, Andrew, for the questions. Let me answer the one on stop and shop. I mentioned already earlier that for those stop and shops which we have remodeled, we're in line with the pro forma on sales. So we see a considerable sales uplift compared to our control groups. And that also a part of the total program is not only the modernization of our stores, but that we also invest in price, which is, of course, ongoing. The second thing is, yes, the sales, the market share of Stop and Shop might be the most challenged in our brands along the East Coast. As along the whole East Coast, we gain share as a company. So that is a positive. And what we also see in those markets, in those CTA, the market areas where we have modernized stores, we see also that we gain share there. So there's a pretty consistent story. we uh the modernized stores are doing well according to according to proforma in those markets we gain share with those stores 145 stores remodeled and that that we have quite some work to to go first of all 145 is not 400 stores remodels we might not need all of them but we need for sure more than 145. that's why we also opened the capex envelope for 140 million for the stores in the boroughs of New York. We have great expectations there. We remote already one store in the Bronx. And as I mentioned before, that store is doing very well. We are very happy with that because it can also open more shopping experience on ethnicity and on ethnic assortments for a lot of other Stop and Shop stores. That learning is great. The team did a great job there. So that's where we are on Stop and Shop. And I mentioned that the third quarter sees a positive momentum for stop and shop, and we are very happy with that.

And you asked also about the bowl.com sub-IPO, and what I would just say on that one is we're absolutely committed to crystallizing the value of this company. It's definitely one of our most future-focused brands in the group, and we will revisit a potential sub-IPO when the market conditions are conducive. But having said that, it's certainly our plan in the meantime to increase our annual disclosure on it so that you can get even more insight into how that business is doing.

That's really helpful, guys. Thank you very much.

Thank you. I will now hand the call back for closing remarks.

So, ladies and gentlemen, that completes our call for today.

I just would like to make sure that one thing is clearer because we got some questions after the last call that we have not been everywhere clear enough. And it has also a little bit to do with the profile and the model and the business model of our company. We mentioned a lot of things and those on the call here know us quite well. But we just would like to reiterate. that we are a company which is well-invested and with 3% over sales, the adjusted capex target, we are still, compared to our peers, a very well-invested company and also we can carry those investments as well. That's one thing. The second thing, you are used from us that we have a strong free cash flow and with the 2.0 for this year, the up 7.5 billion for the coming years. Also there you can count on a strong free cash flow generation. we still have in place, like for a long time already, our 40-50% dividend payout ratio, and we're loyal to that. And you also have heard from Natalie that we also see the share buybacks as an important instrument also for EPS, and that we also this year will continue, of course, that program. But those four elements, strong capex to support the business, be well invested, free cash flow, strong percentage over sales as a free cash flow yield, dividend 40-50%, And Share Buy Back is an important instrument to us. And I just would like to make sure that we have no misunderstandings here and that we leave this with you before, JP, back to you on your beautiful birthday.

So thank you very much, friends. And we're very much looking forward to being out on the road again physically in Q2. For any follow-up questions, our team is available for the rest of the day. And enjoy a sunny day in August. And I will go and enjoy my birthday now.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers please stand by.